Gold ETF Selling Slows

One of gold’s primary drivers is American stock-market capital sloshing into and out of gold through major exchange-traded funds. Their sustained inflows and outflows partially fuel gold’s bull-market uplegs and corrections. Interestingly the differential gold-ETF-share selling that exacerbated gold’s recent correction is greatly slowing. Gold’s next upleg depends on those capital flows reversing to buying, accelerating its gains.

Gold’s largest and most-popular exchange-traded funds are increasingly coming to dominate gold price trends. Cheap and easy to trade, they act as direct conduits for the vast pools of stock-market capital to access gold. Stock traders use these gold-ETF shares to instantly gain or shed gold exposure in their portfolios. The collective capital flows through gold ETFs are responsible for ever-more of gold’s price action.

The best available data on global gold supply-and-demand trends is published quarterly by the venerable World Gold Council. Its outstanding Gold Demand Trends reports are essential reading for all traders interested in the precious-metals realm. Among many things tracked by the WGC analysts is the size of the world’s gold ETFs. Two American behemoths have come to utterly dominate that gold-moving space.

They are of course the GLD SPDR Gold Shares and IAU iShares Gold Trust. GLD was the original gold exchange-traded fund, launched way back in November 2004. It was a bold WGC initiative to make gold far more accessible to stock-market investors. Before that pioneering gold ETF, diversifying into gold required directly buying physical coins which unfortunately often proved expensive, inefficient, and cumbersome.

GLD grew popular, parlaying its first-mover advantage into an insurmountable lead among gold ETFs. As the last quarter ended, GLD held 1,268.9 metric tons of physical gold bullion in trust for its shareholders. The WGC’s latest Q3’20 GDT report revealed GLD then commanded a whopping 32.7% of all the gold held by all the world’s physically-backed gold ETFs!That dwarfed the second-place gold ETF at 518.2t and 13.4%.

Interestingly that is IAU, which wasn’t born much later in January 2005. But for long years IAU labored in relative obscurity eclipsed by GLD’s long shadow. For example, when gold’s last secular bull peaked way back in August 2011, IAU’s gold-bullion holdings ran just 13.1% of GLD’s. But recently in August 2020 when gold’s latest bull upleg crested, IAU’s holdings had surged ahead to triple to 39.2% of GLD’s own!

IAU has really only been catching up with GLD over the past few years or so. I suspect that has arisen from institutional buying, as IAU has a major advantage over GLD. IAU’s annual expense ratio of 0.25% makes it cheaper to own than GLD’s 0.40% per year. These cover the operating costs necessary to run physically-backed gold ETFs, including paying people and vaulting varying gold bullion depending on demand.

Saving 15 basis points in yearly fees with IAU appeals to professional money managers, as their super-competitive world requires finding every advantage. IAU is also owned by BlackRock, the world’s largest asset manager running an astounding $7.8t of assets! When BlackRock managers want gold exposure for their clients, they naturally use their in-house IAU. So IAU’s growth has outpaced GLD’s in recent years.

With this overtaking showing no signs of abating, analyzing stock-market capital flows into gold ETFs now requires looking at GLD and IAU together instead of just GLD. Together they commanded 46.0% of all the gold bullion held by all the world’s gold ETFs at the end of Q3’20! The third-place physically-backed gold ETF in the UK merely ranked at 6.5%. So GLD+IAU overwhelmingly dominate gold-ETF capital flows.

Gold ETFs’ mission is to track and mirror the underlying gold price. But the supply and demand for gold-ETF shares is independent from gold’s own. So the only way these ETFs can maintain price parity with gold is to shunt excess gold-ETF-share supply and demand directly into gold itself. That requires making these ETFs actual conduits for stock-market capital to flow into and out of real physical gold bullion.

When gold-ETF-share demand exceeds gold’s, those share prices will decouple from gold’s to the upside. Gold-ETF managers prevent this by issuing enough new shares to offset this differential demand in real-time. Then they immediately plow the proceeds from those new-share sales into buying more physical gold bullion for their vaults. So when gold-ETF holdings are rising, stock-market capital is flowing into gold.

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